I still remember my first Toastmasters’ speech on the need to save for retirement. It was actually from a couple of decades ago, which is hard to believe. You see, I wanted to improve my public speaking skills. My boss suggested that I attend these events where I would get a chance to practice speaking in front of others. But that’s neither here nor there. The reason I remember the speech so vividly is actually due to a remark the person who was rating my performance made after I finished. He mentioned that him and I were both still in our 20s, and therefore didn’t really need to worry about retirement planning yet. I didn’t argue want to argue with him, but I remember musing to myself about how wrong he was. Here’s why (along with some other retirement myths you need to stop believing).
Myth #1: Don’t Worry About Retirement Until Age ______
It’s been roughly two decades since that speech. If that man took my speech more seriously and started saving for retirement at that exact moment, he would be so much further ahead right now. After all, any dollar he put in a S&P 500 fund is now worth six dollars, judging by the 6x performance of Vanguard’s S&P 500 index fund (VFIAX) in the past 20 years. Meanwhile, I’ve been saving for retirement since I worked part time as a teenager. Any dollar I saved then is worth at least ten times it’s original worth by now, and continues to grow my nest egg.
Not needing to care about retirement until you are a certain age is one of those myths that some people falsely cling onto. It’s never too early too start saving. I started very early, compared to most people. I’m still relatively young but I’m pretty much guaranteed a financially comfortable retirement. When are you going to start saving?
Myth #2: It’s Too Late To Save For Retirement
On the other hand, there are some of us who’ve never saved for retirement. We think it’s too late to bother starting. One of my friends is the typical broke over-achiever we often write about. He makes at least $500,000 a year, so money should be no issue. However, he lives an even faster lifestyle that demands every penny of his salary.
He’s got so many grown-up toys (cars, boats, etc.) that he’s hundreds of thousands of dollars in debt. That doesn’t even count the millions of dollars he’s borrowed to buy his house. Hopefully, he’ll walk away in retirement with a ton of equity in his house. Then again, considering how often he’s been taking out cash out refinances, that outcome isn’t a guarantee either.
He Can Still Turn It Around
Luckily for him, he’s a high earner. He likely has an extremely bright career ahead of him. He’s in his 40s now, which is a late start for retirement. Then again, he makes enough to catch up quickly. All he has to do is commit to saving some of his considerable income. If his earnings stay consistent, he could even wait until 50s before he starts putting money away and still be fine. But every day he waits is an increased risk.
His retirement won’t be the life he’s used to. It’s almost impossible that he’ll be able to keep up his spend-happy ways. However, every dollar he starts committing to retirement will be better than a dollar wasted on his next fast car. After all, every dollar he puts towards his retirement now will help reduce the financial stress of the lifestyle he’s currently used to once he stops working.
Myth #3: I Don’t Make Enough Money To Save For Retirement
This brings us to the third myth. It can be discouraging to hear hear stories like the one about my friend. After all, he makes half a million dollars every year. It doesn’t take a math genius to see that he’ll probably be okay, as long as he reigns in his spending desires just a little bit. He makes more than enough to jump start his retirement savings at any time.
On the other hand, there are a lot more people on the other end of the financial scale. Those who make enough to keep getting by, but not really enough for everything they need — including generous retirement fund contributions. We have trained ourselves to live on less over the years. We therefore think we can also live on less once we retire. Above all else, though, it’s hard to put money away for retirement when there’s simply nothing less from your paycheck after all the necessary expenses are covered.
There’s some good news, though. If you’re already used to a fairly frugal, non-luxurious lifestyle, you won’t need to save as much money as my free-wheeling friend will. He’s going to be in for a big shock when he realizes he can’t afford his fancy toys and exotic travels. Meanwhile, those with even meager retirement savings should be able to continue living the same lifestyle.
Don’t Forget That There’s Help
In addition, a small nest egg means that the government entitlement programs will help out with a bigger portion of our budget than the high earners. Medicare, Medicaid, and Society Security (to name a few) will all help us more than they will for my friend.
I know people who live on Social Security alone. Sure, that sounds far from ideal. However, these people live a very decent and happy life in retirement. It’s not like they are resorting to those “eating cat food” scare articles that people pass around. If you work for 40+ years of your life, you should get a decent boost from these government programs designed to help.
Myth #4: Social Security Will Disappear
Of course, the government having our backs is predicated on these entitlement programs not going broke themselves. It’s no secret that the Social Security program is in financial trouble. Studies after studies have shown that the program has a surplus now (as designed0. However, it’s going to run out of money in the not-too-distant future.
In fact, the date in which the trust fund runs out of money has been pulled forward so many times, depending on which news story you last heard. I wouldn’t be surprised if it runs out of money within the next 10 years. The situation sounds so dire that many of the people I know are planning for a a retirement assuming that they’ll get nothing from Social Security at all.
Social Security Is Here to Stay
These fears are misguided though. Yes, Social Security is in trouble. However, the program is a pay-as-you-go program. This means today’s obligations are funded with today’s workers’ pay. In the future when the surplus runs out, there will still be workers who will be paying into the program that will fund tomorrow’s obligations.
Social Security is such a cornerstone to our country’s retirement benefit that it’s hard to imagine any political head willing to risk all retiree votes by not addressing any issues that will drastically cut benefits. Could Social Security be drastically cut or even eliminated? Sure. Anything is possible. It’s just extremely unlikely. After all, imagine the uproar if the government suddenly decided it was going to keep all the money you’ve paid into Social Security over the decades. Yes, it’s your money. They’d simply print more money before allowing the program to go completely broke.
Myth #5: The Volatility Of The Stock Market Isn’t Worth It
Are prognostications of doom and gloom holding you back from investing? Don’t let them rule your life — or your financial future. For the most part, investing holds up over the long haul. A trend line might look scary in the short-term. However, take a step back and watch market performance over decades. It really changes the picture.
A broad approach can help you overcome worries about a sudden market drop. The more you learn about stock market investing, the better you’ll understand that the market almost always recovers and thrives over a long enough period of time.
Remember how I said some of the money I invested when I was a teenager grew ten times? The pot didn’t grow in a straight line. There have been some scares. The Dot Com crisis saw my savings cut in half. It recovered, only to get cut in half again during The Great Recession. They were seriously steep drops, and definitely scary. But really, all you had to do was hang in there, not panic sell, and wait for the market recovery in order to reap the rewards.
Myth #6: A Million Bucks Will Do The Trick
Being a millionaire isn’t what it used to be. It’s still a ton of money, sure. However, it certainly doesn’t mean a life of no longer caring what anything costs. In fact, I don’t think that happens until you’re worth at least $30 million. The number may be smaller for some, I suppose. But only if you don’t manage your own money or if you’re still working a job that pretty much pays for your lifestyle.
So why the discrepancy? The reason has to do with inflation. The term millionaire was first coined in 1719 during the Mississippi Bubble. That was roughly 300 years ago, when having a million dollars did make you uber-wealthy. As time went on, inflation slowly chipped away at the purchasing power of every dollar. Now, there are estimated to be 48.6 millionaires around the world. More and more are minted by the day. Eventually, billions of people around the world will be millionaires.
If you are planning for retirement, being a millionaire is a good goal. Do some quick math. If you retire at 65 and assume you’ll live to at least 85, you need funding for 20 years. A million bucks saved only provides $50,000 per year. That’s a decent enough sum, but what if you need more due to a sudden expense? Or if you end up living ten extra years that you didn’t really plan for? Some day soon (maybe even now?, being a millionaire will only be considered middle class. You’ll probably need more than a cool million to retire comfortably.
Myth #7: Your Investments Need To Be More Conservative As You Age
A popular rule of thumb for setting an appropriate asset allocation is to set your bonds percentage as your age. The “age in bonds” rule has other derivatives, such as “100 – your age in stocks” or other “number – age” scenarios. The gist of all these rules is that the older you are, the more “safer” bonds you need in order to keep your portfolio stable.
This advice is because an older retiree can’t deal with the devastating effects of a market crash the way I could in my 20s and 30s. I didn’t need the money for another few decades, so it didn’t matter when my savings were cut in half. They had time to recover. I would have panicked much more if those crashes happen when I’m nearing retirement, though. So lots of folks start shifting their assets once they hit 50, 55, and 60 years old. They opt for something a bit less volatile, to shield themselves from any major downturns. The worst nightmare for a retiree is to run out of money in retirement.
There’s A Better Way
However, studies have shown that retirees are most vulnerable to running out of money right when retirement starts. To combat the effects of inflation over a long retirement and guard against a sudden crash in equity prices at the start of retirement, the safest approach is to be the most conservative at the start of retirement and actually slowly increase stock exposure as you age.
This goes against most commonly accepted retirement advice. I understand if you don’t really believe me. But do some more digging (and some more math). It’s important enough to look into, right? After all, if you can keep earning investment money in post-retirement, that just provides even more financial freedom for your golden years.
The Bottom Line
I’ve sadly lost touch with the person who commented on my Toastmaster’s speech from decades ago. All I can hope is that he changed his tune about it being too early to worry about retirement. He’ll be in his 40s now, so he could be in for some tough times if he still hasn’t started saving for retirement.
If I could go back in time, I would have tried to refute the argument he made that day. He might not have listened. It might not have made any difference. On the other hand, there was a chance I could have changed someone’s retirement trajectory for the better that day. Considering I now make a living trying to guide other people to financial success, I consider that moment a bit of a missed opportunity. These days, I’ll happy refute someone any time I hear them parroting one of these common retirement myths. And you should too. It’s our responsibility to set the record straight.